Consumer price inflation has come down from 4.2% in October 2016, when the Reserve Bank of India (RBI) last lowered its repo rate, to 1.54% in June 2017. Why hasn’t RBI lowered its policy rate since last October? A look at how the views of the members of the monetary policy committee have evolved this year will provide some answers as well as clues to how they are likely to vote at the meeting on 2 August.

Urjit Patel

RBI governor Urjit Patel. Photo: Abhijit Bhatlekar/Mint

February 2017 meeting: The RBI governor said the rebound in vegetable prices could be sharp. He worried about sticky core inflation, rising crude and commodity prices, rising rural wages, the inflationary impact of the 7th Pay Commission allowances and exchange rate volatility due to US policies. He recommended a shift from accommodative to a neutral rate.

April meeting: He acknowledged that inflation would undershoot the target of 5% for the fourth quarter of 2016-17. The old worries are reiterated and new ones include the goods and services tax (GST) and geopolitical risks.

June meeting: The governor said that inflation was low, but he voted against “premature action", saying the near-term inflation outlook remained highly uncertain. He observed that core inflation was down, but did not mention geopolitics or GST, or US policies or exchange rate volatility or rising oil and commodity prices. Instead, he said inflation could move up due to higher minimum support prices for farm produce and farm loan waivers.

Ravindra Dholakia

Ravindra Dholakia, Economics professor at IIMA.

February meeting: He said core inflation was sticky, a clear idea of state budgets is needed before deciding on monetary policy, the decline in the headline consumer price index (CPI) inflation is not stable as it is due to lower prices of vegetables and pulses, coupled with transitory effects of demonetization.

April meeting: He forecast that core inflation was likely to go down, oil prices were not expected to remain consistently high, impact on inflation of 7th Pay Commission allowances may not be as high as 1-1.5 percentage points. He had no worries about GST or El Nino, but since liquidity was high, there was no need to cut rates.

June meeting: He pointed to low headline inflation, declining core inflation, lower inflationary expectations, a large output gap, good monsoon, US rate hikes factored in by markets and said the 7th Pay Commission allowances impact would at best be 50 basis points and was likely to be offset by GST, hence a 50 bps rate cut was desirable.

February meeting: Acharya said, “Given the difficulty in resolving this trade-off between temporary effects on output gap and the persistent nature of core inflation, my attention turned heavily to international factors." He said global uncertainty in trade due to protectionist policies, a strong dollar and rising global inflation in food, oil and metals posed significant threats to domestic inflation.

April meeting: He said headline inflation was set to rebound from recent lows. Geopolitical risks and undoing of the centre’s fiscal discipline by the states concerned him the most. He believed the output gap was narrowing and it was therefore best not to change rates.

June meeting: He acknowledged that inflation, both food inflation and core inflation, was much lower than RBI’s forecasts and global and GST risks had not materialized. His new worry was that farmer demands could set off inflationary risks. He said monetary policy would not work well in the current situation of stressed bank balance sheets. He said we need to wait and watch for a few more months.

Michael Patra

February meeting: He said rates needed to be kept unchanged because of risks of high core inflation, reflationary effects of remonetization, the need to focus on 4% inflation and upside risks from higher oil prices, while international financial turbulence and a less than normal monsoon could result in a “perfect storm".

June meeting: He said the fall in vegetable and pulses prices should not affect the monetary policy stance. He pointed to rising farm wages, higher farm input costs. He said the output gap would be narrow and close. He mentioned fiscal slippages, distribution of monsoons, global political and financial risks and 7th Pay Commission allowances as risks. He concluded, “I vote to wait and watch the incoming data while retaining the flexibility of a neutral stance."

Chetan Ghate

Chetan Ghate, professor at the Indian Statistical Institute (ISI) in Delhi.

February meeting: He said vegetable prices always had a seasonal rebound and worried about core inflation, which would exert upward pressure on headline inflation. He was concerned about a balance sheet reduction by the US Fed.

April meeting: Ghate said the decline in inflation was driven by food inflation, which was likely to reverse in the summer. He said the output gap was closing gradually, leading to possible build-up of inflation pressures. He continued to warn of the effect of balance sheet reduction by the US Fed.

June meeting: While acknowledging the “surprising" fall in inflation, he said, “At this juncture, it would be prudent to wait and watch to see (i) whether headline inflation durably evolved in line with the medium-term inflation target of 4% within a band of +/- 2%; and (ii) how other risks (fiscal risks in terms of state farm loan waivers, GST, HRA, the monsoon) impinge on the medium-term target." There was no mention of the US Fed’s balance sheet reduction.

Pami Dua

Pami Dua, director and professor at the Delhi School of Economics.

February meeting: She pointed to sticky core inflation, volatility in forex markets and probability of multiple US rate hikes as concerns.

June meeting: Dua said core inflation remained sticky. She said, “upside risks include the prospect of rising rural wage growth, the resulting boost in consumption demand, fiscal slippages in the form of farm loan waivers and a possibility of disbursement of allowances under the 7th Central Pay Commission’s award". She said it was better to wait and watch.

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What comes across from this brief survey is that a host of varying reasons have been put forward by the MPC members from time to time to justify not reducing rates—when one risk dissipates, another is quickly found. That is as it should be—it is the central bank’s job to be conservative.

So how are they likely to vote on 2 August? Among the MPC members, Dholakia is clearly not just a dove, but a particularly relaxed one and he’s likely to vote for at least a 50 basis point rate cut, if not more. In the opposite corner is Patra, a fearsome hawk who has said he doesn’t believe in conducting monetary policy by looking at the rear-view mirror. Acharya also comes across as a hawk, given that he said at the June meeting that he would watch “the next few months" to check if the trends seen in June are persistent. Will watching for two months be enough? Note that both Dua and Ghate have said they would like to see the impact of farm loan waivers, pay commission allowances, etc. Will they now assume that is water under the bridge? Finally, we have Patel, who has claimed he is neither a hawk nor a dove but an owl, wise and vigilant.

The story goes that when someone teased John Maynard Keynes for altering his views on an economic question, he replied, “When the facts change, I change my mind. What do you do, sir?"

This time around, the RBI may finally decide to echo Keynes.

Manas Chakravarty looks at trends and issues in the financial markets.